Person of the week: Greg Becker: The fear of a bank crash is bigger than shown

Person of the week: Greg Becker
The fear of a bank crash is greater than is shown

By Wolfram Weimer
03/14/2023 09:36 am

The bankruptcy of two US banks triggers a stock market tremor. Investors fear a chain reaction of distrust or even a financial crisis like the one in 2008. Concern in the USA is so great that the President, Fed Chairman and Treasury Secretary want to calm the population.

Joe Biden sounded as serious as a declaration of war. The closure of two banks apparently put the US financial system under considerable pressure, so that the US President felt compelled to calm the population down with some pathos. In a speech he called out to his compatriots: “Americans can rest assured that the banking system is secure.” At the same time, Treasury Secretary Janet Yellen, Federal Reserve Chair Jerome Powell and the FDIC deposit insurance fund announced in a dramatic community statementthat all bank customers can get their money, that the American banking system is “resilient” and “on solid foundations”.

What should have seemed like mega reassurance from the top makes Americans even more suspicious. Many investors and savers are wondering how bad the imbalance and the risk in the US banking system must be when the President, Fed President and Treasury Secretary all swear together what should actually be a matter of course, namely that the money in bank accounts is safe. In any case, the prices of bank stocks on the stock exchanges have plummeted, reports of cash withdrawals and queues in front of US ATMs are piling up. The fear of chain reactions and a bank run is palpable.

Biden’s unusual attempt at appeasement is reminiscent of the legendary appearance of Chancellor Angela Merkel with her then Finance Minister Peer Steinbrück in October 2008. The Lehman crisis had shaken the global financial architecture, there was a risk of a series of bank failures and Merkel promised almost exactly what Biden did now: “We tell savers that their deposits are safe. The federal government is also responsible for this.” The sentences have gone down in history as the “Merkel guarantee,” but Merkel knew even then that her promise was primarily intended to provide reassurance. The federal government later conceded that the declaration was “not a legally binding and therefore independently enforceable guarantee.” In fact, with Germans’ financial assets of 5.9 trillion euros, a collective run on the bank accounts could not have been absorbed by the federal government at all. Merkel’s guarantee was a politically successful ploy to regain confidence in the banking system.

The next imbalance is emerging

This is exactly what Biden is trying to do now. Because the bankruptcy of the Silicon Valley Bank (SVB) is highly dangerous. It is already the largest collapse since the global financial crisis of 2008. The institution had assets of $209 billion on its balance sheet at the end of 2022, making it the number 16 in the US banking industry. The SVB was the central financial institution in the tech scene for startups in the USA. Almost half of all US start-ups processed their financing through the SVB. In the meantime, a second bank has been hit with New York’s Signature Bank. This mixed situation means that customers of actually solid banks suddenly become suspicious, withdraw money and thus put their institutes in distress. Loan defaults and bursting investor commitments can also trigger a chain reaction, the refinancing cycle comes to a standstill because everyone suddenly mistrusts everyone else.

The US authorities absolutely want to prevent this – on the one hand with the political declarations. On the other hand, with the announcement that customers who had invested their money with the Silicon Valley Bank and Signature Bank, which were closed over the weekend, would be protected and would have access to their savings. This also applies to small businesses. The Fed also wants to make it easier for banks to access liquidity in this acute crisis, so that there are no acute bottlenecks if withdrawals continue. But the next imbalance is already emerging at First Republic Bank.

The trigger for the problems are the sharp rises in interest rates in the USA. This leads to major upheavals, especially in the tech and real estate sectors, because many deals simply collapse when interest rates rise.

Becker himself brought his money to safety

The bankruptcy of the SVB is already considered a possible end point of the boom years in Silicon Valley. The spectacular success of many tech companies was also based on a phase of cheap money. Many high-risk projects have been lightly funded. That could be over now. The SVB in particular was known for the fact that startups could easily get a lot of money here in financing rounds.

The bank’s CEO was popular in California because he was more courageous and creative in making money flow than the supposedly conservative bankers in New York. Greg Becker announced just a few weeks ago that splendid business was expected again in 2023. “We’re optimistic because our crystal ball is a little clearer,” Becker told CNBCN. Just 24 hours before the bankruptcy, Becker personally called customers to assure them that their money was safe with the bank.

But he himself brought money to safety. According to regulators, on Feb. 27, Becker sold 12,451 SVB shares for $3.6 million. He was also paid an annual bonus shortly before he went bankrupt. His annual salary at SVB was between $9 million and $10 million a year.

employees are angry

Becker had been with SVB for 30 years and worked his way up from loan officer to CEO (since 2011). He staged himself as a hero of the California money world. The SVB website still states today that he is a “champion of the innovation industry”. Under his leadership, SVB rose to the S&P500 index, was voted one of the best banks in the US, and became the world’s leading institute for innovation financing. Becker let himself be celebrated as a donor and philanthropist, as someone who embodies the avant-garde on gender and environmental issues and sought closeness to politicians like Al Gore. Becker served on the board of directors of the Federal Reserve Bank of San Francisco and has advocated that insider trading should not be overly time-limited. This is exactly what he has now benefited from.

As CNN reports, there is now open anger among his staff at their boss, who led the bank into bankruptcy with excessive risks, all sorts of clumsiness in crisis management and blatant self-enrichment. Becker’s video message to employees on Friday is perceived as cynical. In it, he said the 48 hours leading up to the bank’s collapse must have been “incredibly difficult”. But Becker let the BBC know in December that there was no need to worry in his industry anyway. Good people in the innovation economy always have “really endless possibilities”. With the millions saved, his own opportunities are certainly greater than those of his employees, who are now out of work.